EDITOR’S NOTE: Prosecutors and Paul Burks are clashing over expert witnesses and the admissibility of certain evidence. The article below reproduces the anticipated core of Burks’ trial defense, as advanced by his lawyers. This article is not intended to be all-encompassing. Prosecutors, of course, have an altogether different take. They have posted the indictment against Burks here.

UPDATED 10 A.M. EDT JULY 5 U.S.A. The Ponzi-related criminal trial of Paul Burks of Zeek Rewards is scheduled to begin tomorrow (July 5) in federal court in Charlotte, N.C. Burks is 69. He is charged with wire fraud, mail fraud, conspiracy to commit both and tax-fraud conspiracy. Prosecutors say he fabricated numbers, sent bogus tax forms and duped Zeek members into believing he was at the helm of an enormously profitable enterprise.

If convicted of the charges, Burks potentially could face decades in prison — effectively a life sentence.

His defense is led by Noell P. Tin, C. Melissa Owen and Jacob H. Sussman of Tin Fulton Walker & Owen of Charlotte. The firm has carded some notable wins for clients.

The office of U.S. Attorney Jill Westmoreland Rose is handling the prosecution. Among those on the prosecution team are Jenny Grus Sugar and Corey Ellis, both Assistant U.S. Attorneys. The judge’s calendar also shows Assistant U.S. Attorney Benjamin Bain-Creed as a member of the prosecution team.

Rose is well-known as the lead prosecutor in the classified-leaks case against Gen. David Petraeus, who pleaded guilty. Some Zeekers bizarrely have tried to portray the Tin Fulton firm as country bumpkins. Here we’ll point out that Sussman, one of Burks’ lawyers, was on the Petraeus defense team. The general was sentenced to probation.

What follows are snippets from June 28 trial brief by the Burks defense team (italics added/light editing performed):

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INTRODUCTION The defense anticipates presenting lay and expert testimony, and numerous exhibits, in support of a defense that goes to the heart of the charges against Mr. Burks. The defense will dispute, among other things: (1) that Mr. Burks made material misrepresentations regarding the ZeekRewards program; (2) that Mr. Burks’ company, Rex Ventures Group, had no books and records; (3) that ZeekRewards was a Ponzi or pyramid scheme; and (4) that Mr. Burks ever intended to mislead ZeekRewards affiliates.

STATEMENT OF ANTICIPATED FACTS Mr. Burks was previously the owner of Rex Ventures Group (“RVG”), a single member L.L.C. that began in 1997. During the time frame alleged in the indictment, RVG was comprised of two divisions: (1) Zeekler, a penny auction website; and (2) ZeekRewards, a multilevel marketing program RVG conceived and promoted as the marketing arm of Zeekler. RVG’s product was bids which were sold in the form of retail bids for the Zeekler penny auction or VIP sample bids for ZeekRewards affiliates.

Affiliates who purchased sample bids gave them away to promote the Zeekler penny auction, which in turn entitled the affiliates to participate in RVG’s Retail Profit Pool.

A. Paying what he promised. As set out on the ZeekRewards website, affiliates who met certain qualifying criteria (e.g., paying a subscription fee, giving away sample bids, and placing ads to promote the Zeekler penny auction) were promised up to 50 percent of RVG’s net daily profits. Evidence at trial will show the company performed as promised. From January 1, 2011, when the program began, until August 16, 2012, when the doors closed, RVG took in $938.8 million in cash from affiliates and auction customers.

During the same period RVG paid $499.5 million . . . to affiliates in cash as the RPP Award. In other words, RVG made good on the core of its promise by paying out 53.2 percent of its revenues to affiliates. The government has repeatedly asserted, and will continue to assert, that Mr. Burks kept no books or records. Acceptance of this argument will require the jury to find that RVG’s SQL database contained no records.

In fact, the SQL database contained terabytes of data consisting of approximately 589 tables with hundreds of millions of rows. The SQL database was accessed daily by Mr. Burks, the company’s technology personnel, as well as over 2 million ZeekRewards affiliates who relied on it to keep contemporaneous track of their accounts. Through the SQL database affiliates accessed their respective back-offices to monitor their VIP Point balances, to place ads, to select the percentage of RPP Award they wanted as VIP bid repurchases versus cash award, to check their available cash balances, to request cash payments, and so on.

Similarly, the SQL database was at all times available to Mr. Burks and provided him the information he needed to run RVG, including the information he needed to determine each day’s Retail Profit Pool percentage.

B. Bid sales were final. VIP sample bids were not, as the government suggests, “represented as functioning like shares of Zeekler stock.” . . . To the contrary, before participating in ZeekRewards, affiliates were required to sign a statement acknowledging the following: Submitting this payment confirms that you understand you are purchasing VIP Bids to use as samples to give to potential retail customers. You also understand that this purchase is non-refundable and is not a “deposit” or “investment” and cannot be “withdrawn” later. You affirm that you have read and understand the ZeekRewards Policies and Procedure and agree to all of their terms. NO REFUNDS CAN BE MADE AFTER PAYMENT IS PROCESSED.

Completed and submitted bid purchase forms, of which there are thousands in number, will be presented to the jury.

C. Mr. Burks made changes to the program in good faith based on the advice of experts. During the life of the ZeekRewards program, Mr. Burks retained a number of experts to advise him on complying with the myriad of laws governing the multi-level marketing industry. Many of these experts (including accountants, attorneys, and others) had combined decades of experience in the industry and were regarded as leaders in their respective fields. Many programmatic changes the government will claim were “cosmetic” . . . were initiated not by Mr. Burks, but by those he had hired to advise him on how to run ZeekRewards.

Equally important, many of the changes Mr. Burks made did nothing to disguise how the ZeekRewards program operated. Some of these changes Mr. Burks made included the following:

Adding the requirement of giving away sample bids

Instituting compliance courses for affiliates

Upgrading the internal accounting system

Eliminating lead generation programs

Hiring a call center in Atlanta to respond to affiliate inquiries and complaints.

The defense expects to call many of these experts as trial witnesses.

D. Dealing with the challenges of explosive growth.

Nobody could have foreseen how much the ZeekRewards program would grow in such a short period of time, approximately 18 months. As witness Kevin Walker has stated, the company “took off like a rocket ship.” Indeed, the growth in numbers of affiliates was staggering. As of December 31, 2011—12 months into the life of ZeekRewards—the program had 57,597 distinct active usernames. This figure increased to 208,601 by March 31, 2012 and 1.25 million by August 15, 2012.

In terms of revenue, average daily revenue went from $5,905 in the first quarter of 2011 to $8,429,626 in the third quarter of 2012. By August 16, 2012, Zeekler.com was the 890th most visited website in the world and ZeekRewards.com ranked 130th globally.

Growth of this magnitude was overwhelming. Despite Mr. Burks’ efforts to bring in additional personnel to address the problems that came with growth at this level, many of the problems RVG encountered—with banks, payment processors, and customer service—were attributable to growth at an unforeseeable rate.

E. The issuance of Forms 1099 was based on sound legal advice—and was anything but evidence of “lulling.” Mr. Burks was advised that it was appropriate—indeed, necessary—to issue 1099s to affiliates. This created all manner of complaints and criticisms. The reality for affiliates that they would have to pay taxes for money earned through ZeekRewards, even if they had chosen to repurchase bids in lieu of a cash payment, was a difficult one for some to accept. But it was the law according to Howard Kaplan, a tax attorney who had previously worked for the IRS and who was retained to advise RVG.

Mr. Kaplan’s advice was unambiguous. As he stated in an email, “I have also given this some thought and I concur that because of the way your plan is structured, there is constructive receipt because of the choice your affiliates have.” Mr. Kaplan repeated the same in conference calls with affiliates. Mr. Burks is not a tax attorney. He relied on the assurances of the people he paid and hired.

Opening statements today, and then let the fireworks begin. I hope all have their favorite chair, popcorn and big drink ready for what is going to be a bumpy ride for trial.

While they anticipate this not taking more than 3 weeks, I would not be surprised to see it go past the 3-week period. There are going to be a lot of motions and counter-motions filed during this trial that will take away time for the witnesses testimony on both sides. I guess Paul’s lawyers learned from Andy Bowdoin’s Evidentiary hearing not to have Gerald Nehra testify. For those that don’t know what I am talking about, Gerald Nehra testified on behalf of Andy Bowdoin and ASD Cash Generator and the judge stated that Gerald Nehra almost single-handedly made the case for the prosecution.

Only wish I could be there for all the firework, as this is going to be a barn-burner of evidence and behind the scenes chicanery that went on.

Lynn, I have contacted the reporter at The Dispatch and they will not be covering the trial on a daily basis; they are one reporter short, it seems. Not sure if the Charlotte Observer is covering it much, either. I have been relying on the case docket.